The struggle putting this together
While I was copying over the posts for the suckisstaples page, I encountered this gigantic thread and just couldn’t possibly put it in the other page.
The tab I loaded the HTML file in said it was using 1.6GB. My printer says it is 2,704 pages long. The file is 18.5 MB, which is crazy when most files are 30-50 KB each.
I tried doing it in chunks, but dragging the mouse over the text for a full 3 minutes (180 grueling seconds) was mind-numbing and barely moved the tiny little scroll bar, not even a bar, actually; it could only be called a nib at best.
After the 7th “Page Unresponsive” dialog showed up, I gave up and went out for a walk. When you hit Ctrl+A and the computer just pauses for a while before it goes blue, that is impressive. It pauses long enough for your mind to start going, “…is something wrong?”
I don’t mean to rant, I just want you to know that this took considerable effort on my part.
I am making edits for readability. There are also formatting issues related to the copy/paste process. I will be only including the Overview by SUCKISSTAPLES and the FAQ by Wikipost.
Individual posts are not included in this reproduction due to time constraints and the above mentioned issues with the original content.
WordPress doesn’t allow HTML files uploaded on my plan. You can download the original file on Mirae Market.
- Some Reasons TO BUY investment property:
- Some Reasons NOT TO BUY investment property.
- Wiki Post
- Summary of LLC Related Posts
| Date Posted: Dec/04/2001 8:30 PM Posted By: SUCKISSTAPLES Rank: FW Historian |
As has been discussed, lets start an investment property thread. As Fatwallet Finance readers have likely seen, I am a BIG FAN of buying and owning investment property.
However, unlike with the 5.25% fixed rate Netbank loan (where almost everyone agrees that is a great deal), NOT everyone will agree that owning investment property is such a great thing.
There are legitimate pros and cons, so its not clear cut that owning investment property is right for everyone. Location, your financial situation, and many other factors determine whether it is a good strategy.
Some Reasons TO BUY investment property:
- Its how many of the most wealthy people made their money, Almost everyone who is a multi-millionaire my family knows is not from the Internet boom, but from buying real estate and holding onto it.
- It can provide a steady source of income in later years after mortgages are paid off and you stop working (especially if you havent set up a retirement account)
- A GREAT time to consider becoming a landlord is when you are considering selling your current home to move to another one. As long as you can get enough rental income to pay the existing mortgage on it, Why pay the realtor’s commission, and other costs, when you likely now OWN a great piece of rental property!
- Rents tend to go up each year, while the mortgage on the investment property remains fixed…thus, more CASH IN YOUR POCKET as the years go by.
- You can claim a HUGE tax deduction for rental property! (I am not a tax expert so I will let others better qualified elaborate on that one)
- It plain feels good to own a lot of property. Its the AMERICAN DREAM.
Some Reasons NOT TO BUY investment property.
- It can be a headache dealing with problem tenants and problems in the house.
- There may be some months you will take a loss for repairs, finding tenants, etc, and you should be in a position to be able to weather these losses.
- Well, that’s about the only 2 main problems I can think of.
TIPS AND TRICKS:
If starting out, you want to find property where you will break even or possibly earn positive cash flow, meaning that the rent you will receive will exceed the mortgage payment, taxes and insurance.
This way, owning the investment property will not be a current burden on your budget, as it “pays for itself” or even makes you a little money each month.
CAUTION:
If you tell you realtor you are looking for properties that will get you the most positive cash flow, they may show you “ghetto” properties” that can be more trouble than its worth.
Do your own research on what rents are in the area, and how much the mortgage, taxes, etc. will cost.
As with all property, LOCATION LOCATION LOCATION. And what “kind of landlord” do you want to be?
SLUMLORD:
Some of the most money to be made is in the ghetto, in areas where you can buy houses and apartments for $20k and under and rent them out to people on govt. subsidies for 3-400/month.
But the problems associated with that come as well. Most people who are successful doing this own a number of these properties (they make money by volume), and also have a network of people who collect rent, harass and intimidate tenants, etc.
And there’s that stigma of being a slumlord.
“NON-SLUM” APARTMENTS/DUPLEXES/CONDOS:
Again, there is a lot of money to be made here, the downside is you will have lots of tenants (and more tenants usually means more headaches), and the people who reside in these places are not as stable
SINGLE FAMILY HOUSES:
I personally prefer to rent single family houses in nice areas. The tenants you will find for these residences are more stable, and nice houses appreciate more than ghetto houses or duplexes….Fewer tenants= fewer potential issues.
AVOIDING problems:
I have chosen to have my properties managed by a professional management company. The quality of these firms vary greatly by area, a good idea is to talk to realtors in the area, as many own managed rental property themselves, and may get a “bonus” or discount on their own management for referring new business.
They usually handle all dealings with tenants, from finding and screening tenants to collecting rent to maintenance, etc. They typically charge between 6%-10% of the monthly rent.
They are especially useful if the rental property is not in your area, as it may be more difficult to manage rentals in other areas.
Home Warranty:
I also choose to maintain a HOME WARRANTY on the properties.
A home warranty covers the electrical, plumbing, and appliances in the home for about $30-40 month. There is usually a service call fee of $35-50.
This way, I do not have to worry about there being a $1000 repair any given month, and as soon as a problem develops, they can call a 1-800 # 24 hours a day and someone will be right out to fix it.
This eliminates anyone calling me and bothering me.
Of course, since there is not one clear cut “best” way to own rentals, there will be people who will disagree with my strategy, and I encourage anyone else to share their tips and strategies on their investment property!
Wiki Post
| Date Posted: Dec/04/2001 8:30 PM Posted By: WikiPost Rank: New Member |
In general 1% rental income before expenses should be the minimum criteria to buy a rental property
so a 100k house should fetch 1000$ a month of rent, or more
Four-plex’s will make you 2% or more!
NOTE: Information below should not be mistaken for the absolute answer. Make sure to contact a legal representative BEFORE getting involved in the process. Please also realize that information can change drastically from region to region.
Links:
Fatwallet RealEstate FAQ’s
BankRate.com
Realtor.com
HELOC FAQ Thread
IRS Publication 527
$25,000 rental loss deduction (IRS website)
Investment Rental Property FAQ
| Does anyone have any recommendations on books for basic land lording, property management? |
- LANDLORDING, by Leigh Robinson.
- How To Pick Up Foreclosures, by Wade Cook. Recommended by MaxMojo
- How To Buy Foreclosed Real Estate, by Theodore Dallow. Recommended by MaxMojo
| How do I find out if an area is good for being a rental property? |
MaxMojo said:
Try the local Chamber of Commerce, Realtor Board, or gov to try and find current housing stats. You’re looking for a low vacancy rate, low new housing starts, population growth, and a strong local economy.
| What should I be looking for in a house? |
Daniel2218 said:
It ultimately depends on all the variables. Just because there are a lot of apartments for rent doesn’t necessarily indicate less demand.
At the peak of the rental market in Seattle, for example, about two years ago the classifieds were full of listings but decent quality apartments were still renting very quickly.
Also, just because there are 50-80 duplexes in your neighborhood, isn’t necessarily a negative. What I would do is call and pretend I’m a prospective tenant. I investigate all the variables (see below).
If you do that to 8 properties in every area you are interested in, you will then have excellent data to extrapolate potential income & expenses, and most importantly you will be confident in your decision.
VARIABLES I WATCH FOR:
(1) FIRST and FOREMOST, exterior appeal. When a prospective tenant takes a drive by, will they keep on driving???
Is it attractive enough that they could see themselves living there? What do the surrounding properties look like? (Best house/duplex in worst area, etc.)
Just because a property doesn’t look good upon purchase doesn’t mean it can’t look good when you get done with it, with minimal expense. View the property with potential in mind, not just it’s current status.
(2) INTERIOR ATTRIBUTES: What’s the size of the apartment/house. Size of the bedrooms, living space, etc.
In the case of a duplex-4plex, 1 BR apartments should be at least 600 sf or larger. 2 BR’s should be 800sf and up. If it is too small, for example, you can assume that you will not get the couples, only solo tenants.
This means your rent will not escalate as fast (shared expenses means less impact on their bottom-line, thus they can absorb more rent increase before needing to move).
What’s the condition of the house/apartment? Needs new carpet? bath remodel? dirty? smokey? Condition of kitchen? I’ve done probably 40 cosmetic remodels and can pretty accurately guess what’s it’s going to cost after walking through an apartment.
Other things: Is there existing laundry? is the plumbing copper or steel? Has the electrical been upgraded or is it the old knob & tube? Roof condition? What’s the heating source? Who pays the utilities? etc. etc.
The more you observe the better educated decisions you will have.
(3) NEIGHBORS WITHIN THE PROPERTY/NEIGHBORS ON THAT STREET: A telltale sign is the cars in the driveway. If you see lots of junkers, you have a pretty good idea it’s a rough area. Also the condition of the yards, landscaping, etc.
VERY IMPORTANT: Real Estate Confucius say: the quality of the apartment/house will dictate the quality of the tenant and, in turn, the quality of tenant will dictate your monthly Advil bill. 🙂
| What metrics should I use to determine whether a house is worth the investment? |
MaxMojo said:
The “1% Rule” is simply a quick monthly way of the viewing Gross Rent Multiplier, and it suffers from all the shortcomings the GRM has. BTW 1% monthly figures out to a 8.33 GRM.
For example; It doesn’t take into account the down payment, taxes, the upkeep, interest rate, debt servicing, comps, location etc., etc.
It is simply a crude “you must be this tall to ride this attraction” bar of entry that can be used to quickly filter out the overpiced stuff.
Do a few simple property analysis with your figures and see what ratio you come up with that fits your situation. It may be .75%, 1.2%, whatever.
If the prop passes the 1% rules, then it merits a deeper look-see.
| Where do you landlord folks get your forms from and what forms are needed? |
| What kind of mortgage should I get? |
MaxMojo said:
There are many differing opinions on the ideal length of a mortgage. My preference is to stretch it out as long as possible, provided that you put the money you don’t put into the mort payment into a good investment.
A benefit of taking a longer more is that when you’re flush with cash you can make extra payment towards principle buy-down, but if things get tight you can just pay the lower minimum.
| Owner occupied clause? |
SUCKISSTAPLES said:
Re: Owner occupied – this is a gray area, the rule is ambiguous specifically because peoples’ circumstance’s change, and there are several ways to satisfy the requirements…
Keep in mind a lender has little incentive to start trouble if you are paying them every month, as they know you will likely stop paying entirely if they cause problems…
Whichever way you choose to go depends more on your personality, if you are willing to put up the fight if the need ever arises, like whether you try to claim every IRS deduction you can get, knowing that you may have to support your deductions if they trigger an audit…(chances of which are slim).
| If I am married is there any advantageous/disadvantageous to putting the house in one’s name or the other? |
SUCKISSTAPLES said:
Another hint if you are MARRIED is to (if possible) buy properties IN ONE NAME ONLY AS SEPARATE PROPERTY.
This of course means you can only use the income from that 1 spouse to qualify.
The advantages are that EACH of you can buy a property, and the debt wont be counted against both of you on credit reports!
| What appliances are typically provided in a rental home? |
It really depends on the region of the country
| What should I know about foreclosures? |
MaxMojo said:
Foreclosure shopping in most states is broken down into 3 markets:
- Pre-foreclosure, where you bargain with the owner after they receive their notice of default, but before the property goes up for auction.
- At the auction.
- After the auction, where you deal with the bank, or lender, who got the property back at auction when nobody else bid high enough.
All three have their pluses and minuses.
#1 involves dealing with people, usually when they’re in a difficult time of their life.
This requires lots of people skills and can be very time consuming, however under the right conditions can require very little of your money.
#2 is easy, just bring a wad of cash and bid.
This also has the added convenience of the senior foreclosing loan needs to be bid upon and purchased, but most all junior lien are wiped off by the foreclosing auction!
In other words if a first loan of $100k forecloses, a junior second of $25k is simply wiped out, the winning bidder is no longer responsible for it. The downside is that others, including a junior lien holder protecting his position, may bid against you.
And there aren’t that many deals that make it all the way to auction, but they do happen.
#3 is fairly easy, but does take some detective work.
Also most banks are pretty savvy and they have local brokers market repos (know as REO’s) in the retail arena.
| Should I get Home Warrantee? |
Daniel2218 said:
A general thought about MAINTENANCE: I personally don’t use the maintenance contracts.
I think they make sense if you have one or two properties, but one can pretty easily find handymen at $12-15 an hour who will do work with minimal supervision…
MaxMojo said:
A management firm usually charges 6 – 10% for their basic services, 50% months rent to fill a vacancy, and al la carte as different problems pop up.
| What Home Warrantee company should I use? |
SUCKISSTAPLES said:
As far as HOME WARRANTY companies go, they usually are state-specific, and only provide coverage in certain states.
Do a search for home warranty on Yahoo, and there are several sites which compare and list home warranty companies in your state.
Umbrella Insurance is the way to go for liability.
| What should I know about trusts? |
MaxMojo said:
Besides placing any income properties in a LLC or Corp, you may also consider placing them in a trust. Although a trust does not offer any legal liability protection, it does do a good job of “hiding” the asset.
For example, if somebody decides to sue you personally, an ambulance chasing contingency lawyer will run a simple search which will reveal all your property holdings (equity).
However if your assets are in trusts you will appear to own nothing, therefore the lawyer might tell the client that he will take the case only on a per hour basis. This alone will stop many lawsuits cold.
If they spend enough effort they can easily force your trustee to reveal the benificiary of the trust (you) but there’s a good chance they may not get that far. Think of a trust as your first line of defense. It should not replace a proper business entity and a good amount of insurance.
Your trustee should be someone who does not share your last name, lives out of state, is trustworthy, and has some common sense. Your otherwise useless lawyer brother in law is a good candidate.
Trusts cost only a few bucks to establish, have no effect on your taxes, are legal, cost nothing to maintain, are simple to manage, and do not trigger the due on sale clause.
You can also have fun with their names. Try something like “The Thailand Christian Girls Orphans Trust”, or the “Keep Your Greedy Paws Off My Fat Wallet Trust”.
Summary of LLC Related Posts
If you only have 1-2 properties, most posts recommend just buying an umbrella liability insurance instead of setting up a LLC.
Only allow top quality renters, keep good relations with them, and offer a remedy to any issue quickly and sincerely which will reduce lawsuits in general.
One poster stated their tenant was injured slipping on icy walkway and gave them credit of one month rent which not only appeased the tenant, it avoided a lawsuit and did not cause any increase in insurance premium because no claim had to be made on the umbrella insurance.
There were a few posts stating their search for lawsuits against owners with umbrella policies did not find any million dollar type settlements. High dollar lawsuits were in the $100K range.
If you think about it, that must be true because premiums for umbrella liability policies are quite inexpensive. The only way they can be inexpensive is if they don’t payout much in claims.
LLCs
If you do set up an LLC there will be some issues to be aware of:
A) If you have a mortgage on the property, the bank could, in Theory, demand full payment of mortgage because of the change in ownership.
No one posted an experience that it happened. But if interest rates rise and you have a desirable low interest rate, one poster stated he would demand payment if he was a lender so that he could get the funds from you to lend out at the higher prevailing rate.
So, beware.
B) If you plan to buy a new property with a newly established LLC then you will likely pay higher interest rates than a residential loan to an individual.
You will likely have to sign on as a guarantor of the LLC to secure a loan, which means you name will be linked to that property (which is contrary to one of the purposes of setting up the LLC).
C) Some insurance companies will not insure a property with LLC ownership. But one poster got around it by getting a policy with his own name, then instructing the agent to add the name of the LLC.
But, again, your name is linked to that LLC on the insurance policy.
D) LLC helps in terms of limited liability when a tenant of that specific property sues. The LLC usually will limit losses to that specific LLC property.
Also, if you personally are sued, for example, because of a car accident you caused, then any asset you own, LLC or not, is at some risk to that lawsuit. It may be more difficult to find the LLC properties, but not impossible.
Very high reward lawsuits attempt to pierce the veil of your LLC so you must keep up with all the required paper work of running an LLC (ie. meeting minutes, documents submitted to your state, no co-mingling of money, etc. )
Trusts
A frequent method posted of using both LLC and trust: Establish a trust, put the LLC as beneficiary.
One poster stated put the LLC as trustee and yourself as beneficiary. So this requires more searching for the correct method. Don’t use your name within the naming of either the Trust or LLC.
Several posters with numerous rental properties for years stated they do NOT have LLC because of the costs in money and time (tax prep). They have had no issues with lawsuits. They have ample umbrella liability insurance.
Trusts: may help is “hiding” ownership because the name of the trust can be difficult to trace. Does not have the annual costs of money and time as an LLC. But is not a vehicle for limiting liability the way an LLC will.
When you register your property at the County Registrar, the name of trust and trustee will be shown, but not the beneficiaries.
Thus select name of trust that does not disclosed anything about the property or your association to it. Thus select a trustee whose name is not associated with you.
Besides umbrella insurance, you should have “landlord insurance” instead of “homeowner insurance” for rental income property. Landlord insurance is also known as liability insurance.
Some novice rental property landlords will turn their former primary residence into a rental but neglect to change the property insurance from “homeowner insurance” to “landlord insurance” because it costs more for the latter.
It is worth the additional cost for liability protection.
| Who can I pick as my renters? |
Anyone, as long as you do not pick based on a protected class (age, sex, religion, etc.).
See Landlording for a more thorough explanation.
Note this book recommends using a ‘scorecard’ approach to ensure that a consistent approach is used to qualify renters (i.e. 5 points for no negative remarks from prior landlords, -1 point for 1 negative remark, -7 points for 2, etc.).
Tips and Tricks
Daniel2218 said:
LENDER FLEXIBILITY: Lenders consider any property up to four units as a single-family residence and thus the requirements are the same as buying a house, including owner-occupying.
While you will be looking at a marginally larger purchase price (and thus down payment) compared to a standard 2BR house, there are more benefits (IMO).
(Any property with 5 units requires commercial financing and thus a down payment of 25% or greater, depending on net operating income.)
MORE BANG: On a 4-plex, for example, you have more opportunity to raise rents, minimize turnover costs, reduce downside exposure when you have one vacancy (25%) vs. a house (100%), spread expenses over more tenants, not to mention headaches are under one roof rather than running around all over town.
All this potentially equates to more positive (or less negative) cashflow.
DaveHanson said:
Another point in favor of Daniel’s strategy: you can rent 1-3 units out, and save the 2d-4th unit as owner occupied (second place, guest pad for friends, whatever) and get the better finance terms.
Might be a NICE way to go if you then want to sell your main house and need a place to crash while moving into the new place.
SUCKISSTAPLES said:
The main reason I have stayed away from multiple family units is that if you have a fourplex, you have 4 ovens, 4 dishwashers, 8 toilets etc, which can result in higher maintenance costs…
Buying a home warranty also would cost 4 times as much…
But if you have an hookup on maintenance, it shouldn’t be a problem. Also, in the areas I rent, you tend to get a better quality tenant in a SFR than in neighborhoods with plex’s…
Fat Wallet Refugee 